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Unit 6: Internal and External Audit

Self Assessment Notes

State whether the following statements are True or False:
3. It is said that the internal audit functions as an eye of the management.
4. Internal audit is not concerned with the correctness of accounts.

6.3 Essentials for Effective Internal Auditing

Following are the essentials for effective Internal Auditing:
 High organizational status: Whether internal audit is undertaken by an outside audit
firm or by an internal audit department of the company itself, the organizational status of
the internal auditor must be high. In an ideal situation, he should report to the highest
authority of the company. He should have the liberty to directly communicate with the
external auditor.
 Independence: Internal auditor must have the full independence of work. There should not
be any constraints or restrictions placed upon his work. Independence facilitates internal
auditors to render the impartial and unbiased opinion essential to the proper conduct of
audits.
 Technical competence: The internal audit team should be professionally qualified and
adequately trained. The number of staffs should appropriate.

 Due professional care: The internal auditor should exercise due professional care in fulfilling
his responsibilities. Examples of the exercise of due professional care by the internal
auditor are the existence of adequate audit manuals, audit programmes and working
papers.

 Reporting and follow-up: The internal auditor should ensure that his findings with
recommendations should reach to the appropriate authority of the management. He should
also ensure that proper follow up actions have been taken by the management based on
his reports.

Self Assessment

Fill in the blanks:
5. Internal auditor should have the liberty to directly communicate with the ……….. auditor.
6. The internal auditor should exercise due ……………… care in fulfilling his responsibilities.

6.4 Management Functions and Scope of Internal Audit

From past few decades, the size of business organizations has grown tremendously. Accordingly,
the management functions have become more complex. As we have already discussed above,
the main purpose of internal audit is to help management to achieve its objectives. With the
increase of size of business and operations the scope of internal audit has also widen. Now,
internal audit is no more concerned with only verification of financial records, calculations and
clerical operations but also with appraisal of various operational functions on behalf of top
management. In other words, of late, there has been a shift in the orientation of internal auditing
to include what is sometimes referred to as ‘operational auditing’. The scope of audit is very
clearly narrated by Shekhar in his books of “auditing” (p. 105), which is as follows:

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